Vegetables on display for sale at a market in Mumbai, India (Photographer: Dhiraj Singh/ Bloomberg)

Inflation Needs `Close Vigilance,' India Central Bank Chief Says

(Bloomberg) -- Policy makers at India’s central bank expressed concerns about inflationary pressures in an economy that’s expected to pick up steam in the second half of the financial year, with one of them even contemplating a pre-emptive increase in benchmark rates, minutes from the latest committee meeting showed.

Governor Urjit Patel said although headline inflation may have undershot the 5 percent target in the fourth quarter of the financial year that ended in March, the outlook for inflation called for "close vigilance." Other members also expressed concerns about sticky core inflation -- which strips out volatile food and fuel costs.

“Input costs have been rising, which could be passed on to output prices as demand strengthens," Patel said in minutes released Thursday. That, along with a salary rise for thousands of bureaucrats and the roll out of the goods and services tax nationwide, scheduled for July 1, could combine to fan inflationary pressures in 2017-18.

Earlier this month, India unexpectedly raised the reverse repo rate while keeping the benchmark unchanged, effectively tightening policy to step up the fight against inflation. The reverse repo was raised to 6 percent from 5.75 percent while the benchmark repurchase rate was kept steady at 6.25 percent, citing excess funds in the banking system after the government’s clampdown on cash. No economist in Bloomberg surveys had predicted the move.

Pre-emptive Strike

All six members of the RBI’s rate-setting panel voted in favor of the decision. The move followed tightening by the U.S. Federal Reserve and continued a string of surprises at the RBI under Patel that culminated in February with a shift to a neutral monetary stance from accommodative. Surplus funds in the banking system also risk intensifying price pressures and imperiling the RBI’s 4 percent target set for the medium term.

Pointing to rising global inflation and higher rates abroad, one of the policymakers, Michael Patra said he believed a pre-emptive 25 basis point increase in the policy rate would help keep the RBI committed to its 4 percent target.

"It will also obviate the need for back-loaded policy action later when inflation is unacceptably high and entrenched," he said, although he voted to keep benchmark rate unchanged.

Deputy Governor Viral Acharya said the economy was recovering steadily from the cash ban, though activity was uneven.

"Commodity prices, especially crude, have been volatile and so has the exchange rate. Hence, risks are evenly balanced around the inflation outlook," he said.